IV. THE DANGER OF ASSET SALES SHOWS THE NEED FORREGULATORY VIGILANCENothing highlights <strong>the</strong> need <strong>to</strong> maintain regula<strong>to</strong>ry oversight <strong>of</strong> landline <strong>phone</strong> service more than <strong>the</strong> recenthis<strong>to</strong>ry <strong>of</strong> Verizon merging and selling <strong>of</strong>f parts <strong>of</strong> its network. Its recent record in o<strong>the</strong>r states <strong>of</strong> network sales,particularly in Hawaii and nor<strong>the</strong>rn New England, has led <strong>to</strong> disasters for business and residential consumers.The financial malfeasance involved in those sales also emphasizes <strong>the</strong> need for regula<strong>to</strong>ry vigilance <strong>to</strong> protectconsumer and taxpayer interests.S 2664, <strong>how</strong>ever, will leave state regula<strong>to</strong>rs largely helpless in preventing Verizon or o<strong>the</strong>r companies fromundermining local tele<strong>phone</strong> services through shoddy asset sales.VERIZON HAS LEFT A TRAIL OF BANKRUPTCIES AND DEFRAUDED SHAREHOLDERSIN THE WAKE OF ITS ASSET SALESNew Jersey policymakers need <strong>to</strong> plan for <strong>the</strong> almost inevitable sale by Verizon <strong>of</strong> its local landline <strong>phone</strong>service, since Verizon has been systematically selling <strong>of</strong>f those assets in states across <strong>the</strong> country. Beginning in2005, it sold its Hawaii network <strong>to</strong> <strong>the</strong> Carlyle Group, followed by <strong>the</strong> sale <strong>of</strong> its Vermont, New Hampshireand Maine networks <strong>to</strong> Fairpoint Communications in spring 2008. This was followed in 2010 by <strong>the</strong> sale <strong>of</strong>landline assets in 14 states (Arizona, Idaho, Illinois, Indiana, Michigan, Nevada, North Carolina, Ohio, Oregon,South Carolina, Washing<strong>to</strong>n State, West Virginia, Wisconsin, and border areas <strong>of</strong> California) <strong>to</strong> FrontierCommunications. Verizon also spun <strong>of</strong>f its yellow pages division <strong>to</strong> <strong>the</strong> company Idearc in 2006.The Initial Results <strong>of</strong> this Sell-<strong>of</strong>f Spree Have Been a Disaster. Loaded up with $1.6 <strong>bill</strong>ion in debt, HawaiiTelecom went bankrupt in December, 2008. Fairpoint Communications, financing its deal with $2 <strong>bill</strong>ion indebt, filed for Chapter 11 bankruptcy protection in March 2010. Idearc, burdened with $9.5 <strong>bill</strong>ion in debt byVerizon, filed for bankruptcy in 2009.Shareholders, credi<strong>to</strong>rs and ratepayers have condemned Verizon for <strong>the</strong> financial manipulations behind<strong>the</strong>se deals. One shareholder group sued Verizon, claiming Verizon’s been consistently engaged in “Enronstyle”skullduggery involving spin<strong>of</strong>fs <strong>of</strong> “three such transactions accomplished by Verizon Communications[that were] followed by quick bankruptcy - Hawaiian Telecommunications Inc., Idearc Inc., and FairpointCommunications Inc.” 30 Ano<strong>the</strong>r group <strong>of</strong> credi<strong>to</strong>rs said Verizon was just looking <strong>to</strong> get out <strong>of</strong> a “dyingbusiness,” and removed <strong>bill</strong>ions <strong>of</strong> dollars in assets from <strong>the</strong>se spun<strong>of</strong>f companies which were left “adrift,burdened with an anchor <strong>of</strong> debt around its neck, insolvent and without adequate resources <strong>to</strong> survive.” 31CUSTOMERS SUFFERED MASSIVE QUALITY OF SERVICE PROBLEMSAs for <strong>the</strong> effects on cus<strong>to</strong>mers, analyst Karl Bode <strong>of</strong> DSLReports described it this way:Those companies <strong>the</strong>n <strong>of</strong> course couldn’t even properly run <strong>the</strong>ir networks, much less upgrade <strong>the</strong>m <strong>to</strong>next-generation technology. Cus<strong>to</strong>mers under-served and unwanted by Verizon <strong>the</strong>n wound up withcarriers that were crushed under <strong>the</strong> weight <strong>of</strong> Verizon debt. 32For example, when Fairpoint switched from Verizon’s computer systems <strong>to</strong> its own network, it was plagued withcus<strong>to</strong>mer-service, order-fulfillment and <strong>bill</strong>ing problems. 33 The Associated Press noted in 2010 that Fairpoint“has experienced operational problems since buying Verizon Communications’ landline and Internet operationsin Maine, New Hampshire and Vermont in 2008.” 34 These included everything from 9-1-1 services sufferingoutages in 2008 35 <strong>to</strong> residents suffering through DSL service outages that lasted nearly a week in 2009. 36Analyzing cus<strong>to</strong>mer service in <strong>the</strong> states where Fairpoint had taken over Verizon properties, a study by <strong>the</strong>National Regula<strong>to</strong>ry Research Institute (NRRI), <strong>the</strong> research arm <strong>of</strong> state regula<strong>to</strong>ry agencies, declared that,“As <strong>of</strong> early November 2009, 19 months after <strong>the</strong> transfer and 9 months after transitioning <strong>of</strong>f <strong>of</strong> Verizon’soperations support systems, service quality has yet <strong>to</strong> be res<strong>to</strong>red <strong>to</strong> pre-merger levels.” 379 How To Raise The Phone Bill Of The Average New Jersey Family: What S 2664 Will Do To NJ Consumers
HOW STRONG REGULATORY SUPERVISION OF LANDLINE ASSET SALES HAVEBENEFITTED CONSUMERS IN OTHER STATESWhile <strong>the</strong> problems in Fairpoint’s nor<strong>the</strong>rn New England terri<strong>to</strong>ry have been bad for consumers, <strong>the</strong>y wouldhave been worse without strong regula<strong>to</strong>ry oversight, both at <strong>the</strong> time <strong>of</strong> <strong>the</strong> sale and through enforcement <strong>of</strong>public interest standards when <strong>the</strong> company failed <strong>to</strong> live up <strong>to</strong> required regula<strong>to</strong>ry standards.While Fairpoint fought giving consumers rebates for outages <strong>the</strong>y suffered, <strong>the</strong> existence <strong>of</strong> those regula<strong>to</strong>rystandards meant that Fairpoint was required by <strong>the</strong> bankruptcy court <strong>to</strong> pay Maine consumers $1.72 perline a month for 12 months 38 as a condition for emerging from bankruptcy, with <strong>the</strong> Maine Public UtilitiesCommission overseeing <strong>the</strong> settlement. 39Regula<strong>to</strong>ry Oversight Allowed States <strong>to</strong> Leverage Economic Development Commitments from Asset Sales:In fact, good oversight in a number <strong>of</strong> states has allowed state regula<strong>to</strong>rs <strong>to</strong> leverage asset sales by Verizon in waysthat have advanced goals for not only protecting those using landlines but also promoting broader deploymen<strong>to</strong>f advanced technologies and benefitting consumers <strong>of</strong> all telecommunication products in <strong>the</strong> state.When Fairpoint first acquired Verizon assets, it agreed as a condition <strong>of</strong> <strong>the</strong> sale <strong>to</strong> meet clear broadbanddeployment conditions. In <strong>the</strong> case <strong>of</strong> Maine, this was a promise <strong>to</strong> extend broadband <strong>to</strong> 87 percent <strong>of</strong> itscus<strong>to</strong>mers within five years. Despite <strong>the</strong> bankruptcy, Fairpoint was able <strong>to</strong> meet its interim commitment <strong>of</strong>delivering broadband <strong>to</strong> 83 percent <strong>of</strong> its Maine cus<strong>to</strong>mers by <strong>the</strong> end <strong>of</strong> 2010, a steep increase from <strong>the</strong> 68.9percent <strong>of</strong> Maine cus<strong>to</strong>mers who had broadband access when Fairpoint bought Verizon’s operations in 2008. 40O<strong>the</strong>r States Have Used Regula<strong>to</strong>ry Authority <strong>to</strong> Protect Consumers and Deliver Economic Development:Learning <strong>the</strong> lessons from <strong>the</strong> Fairpoint regula<strong>to</strong>ry experience, regula<strong>to</strong>rs in a number <strong>of</strong> states overseeing <strong>the</strong>sale <strong>of</strong> Verizon landline assets <strong>to</strong> Frontier in 2010 demanded even <strong>to</strong>ugher conditions.»»In West Virginia, regula<strong>to</strong>rs required Frontier <strong>to</strong> meet a number <strong>of</strong> conditions, including Making directcapital investments <strong>of</strong> $30 million during <strong>the</strong> second half <strong>of</strong> 2010, $75 million in 2011 (including $12million targeted at service quality), $63 million in 2012 and $63 million in 2013.»»Additional capital investments <strong>of</strong> at least $48 million <strong>to</strong> increase broadband deployment in <strong>the</strong> Verizonservice terri<strong>to</strong>ry.»»Making broadband service available <strong>to</strong> no less than 85 percent <strong>of</strong> <strong>the</strong> households within Verizon service areasby <strong>the</strong> fourth year following <strong>the</strong> close <strong>of</strong> <strong>the</strong> sale»»Capping all regulated rates subject <strong>to</strong> jurisdiction <strong>of</strong> <strong>the</strong> Commission for one year after close <strong>of</strong> <strong>the</strong>transaction.»»Requiring Verizon will fund <strong>the</strong> pension account for employees moving <strong>to</strong> Frontier, and require Verizon <strong>to</strong>remain responsible for employees who have retired prior <strong>to</strong> <strong>the</strong> sale.In Washing<strong>to</strong>n State, state regula<strong>to</strong>rs approved <strong>the</strong> Frontier deal with a wide-ranging set <strong>of</strong> conditions,including 41 :»»Local residential and business tele<strong>phone</strong> rates cannot increase for three years after <strong>the</strong> sale.»»Cus<strong>to</strong>mers will be given credits if service quality fails <strong>to</strong> meet specific standards, including paying cus<strong>to</strong>mersan additional $35 for missed service repairs or installation appointments.»»A $40 million fund will expand high-speed Internet service in unserved and underserved areas.»»An incentive plan <strong>to</strong> prevent any decline in service quality and penalties if service quality deteriorates.»»Frontier will <strong>of</strong>fer stand-alone Digital Subscriber Line (DSL) services at current rates, terms, and conditionsfor two years.»»Frontier is not permitted <strong>to</strong> place a cap on download speed or capacity.Each <strong>of</strong> <strong>the</strong>se regula<strong>to</strong>ry approaches <strong>to</strong> approving asset sales highlight <strong>the</strong> gains <strong>to</strong> states from having effectiveregula<strong>to</strong>ry authority governing local <strong>phone</strong> systems.S 2664 WILL HARM NEW JERSEY CONSUMERS IN THE EVENT OF A VERIZONASSET SALEIn <strong>the</strong>ir report evaluating <strong>the</strong> pluses and minuses <strong>of</strong> <strong>the</strong> regula<strong>to</strong>ry experience <strong>of</strong> <strong>the</strong> Verizon asset sales <strong>to</strong>Fairpoint, <strong>the</strong> National Regula<strong>to</strong>ry Research Institute (NRRI) emphasized <strong>the</strong> importance <strong>of</strong> regula<strong>to</strong>rs having<strong>the</strong> <strong>to</strong>ols <strong>to</strong> effectively protect <strong>the</strong> public interest. To protect consumers and effectively impose conditions oncompanies involved in such asset sales, <strong>the</strong> NRRI argued:Nathan Newman | Richard Brodsky 10